Pump and dump
. Amsterdam, 1720.}} "Pump and dump" (P&D) is a form of that involves artificially inflating the price of an owned through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Once the operators of the scheme "dump" sell their overvalued shares, the price falls and investors lose their money. This is most common with small cap cryptocurrencies and very small corporations, i.e. " ". While fraudsters in the past relied on , the now offers a cheaper and easier way of reaching large numbers of potential investors through spam email, bad data, social media, and false information. Scenarios Pump and dump schemes may take place on the Internet using an campaign, through media channels via a fake press release, or through telemarketing from " " brokerage houses (such as that dramatized in the 2000 film ). Often the will claim to have "inside" information about impending news. Newsletters may purport to offer unbiased recommendations, then a company as a "hot" stock, for their own benefit. may also post messages in chat rooms or stock message boards such as , urging readers to buy the stock quickly. If a promoter's campaign to "pump" a stock is successful, it will entice unwitting investors to purchase shares of the target company. The increased demand, price, and trading volume of the stock may convince more people to believe the hype, and to buy shares as well. When the promoters behind the scheme sell (dump) their shares and stop promoting the stock, the price plummets, and other investors are left holding a stock that is worth significantly less than they paid for it. Fraudsters frequently use this ploy with small, thinly traded companies—known as " s," generally traded (in the United States, this would mean markets such as the or the ), rather than markets such as the (NYSE) or —because it is easier to manipulate a stock when there is little or no independent information available about the company. The same principle applies in the United Kingdom, where target companies are typically small companies on the or . A more modern spin on this attack is known as hack, pump and dump. In this form, a person purchases penny stocks and then uses compromised brokerage accounts to purchase large quantities of that stock. The net result is a price increase, which is often pushed further by day traders seeing a quick advance in a stock. The original stockholder then cashes out at a premium. Examples Stratton Oakmont In the early 1990s the penny-stock brokerage artificially inflated the price of owned stock through false and misleading positive statements, in order to sell the cheaply purchased stock at a higher price. Firm co-founder was criminally convicted for his role in the scheme. He later turned his story into a , , which was later adapted into an -nominated . Jonathan Lebed During the , when stock-market fever was at its height and many people spent significant amounts of time on stock Internet message boards, a 15-year-old named showed how easy it was to use the Internet to run a successful pump and dump. Lebed bought penny stocks and then promoted them on message boards, pointing at the price increase. When other investors bought the stock, Lebed sold his for a profit, leaving the other investors . He came to the attention of the (SEC), which filed a against him alleging . Lebed settled the charges by paying a fraction of his total gains. He neither admitted nor denied wrongdoing, but promised not to manipulate securities in the future. Enron As late as April 2001, before the , executives participated in an elaborate scheme of pump and dump, in addition to other illegal practices that fooled even the most experienced analysts on Wall Street. Studies of the anonymous messages posted on the board dedicated to Enron revealed predictive messages that the company was akin to a house of cards, and that investors should bail out while the stock was good. After Enron falsely reported profits which inflated the stock price, they covered the real numbers by using questionable accounting practices. Twenty-nine Enron executives sold overvalued stock for more than a billion dollars before the company went bankrupt. Park Financial Group Park Financial Group, Spear & Jackson Inc. and International Media Solutions, LLC were involved in a Pump and dump where the price per share increased $ 14.00 and over 100,000 shares being traded each day netting Spear & Jackson around $ 3 million in profits. In 2005 Spear & Jackson and International Media Solutions were fined over $ 8 million including two executive officers paying $ 420,000 out of their personal accounts. On December 5, 2007, Park and the company's president were ordered to pay over $ 113,000 in fines and penalties. Langbar International Started as Crown Corporation, Langbar was the biggest pump and dump fraud on the , part of the . The company was at one point valued greater than $1 billion, based on supposed bank deposits in Brazil which did not exist. None of the chief conspirators were convicted, although their whereabouts are known. A who made a negligent false statement about the assets was convicted and banned from being a director. The investors who lost as much as £100 million sued one of the fraudsters and recovered £30 million. Morrie Tobin In April 2018, and others, using oversea accounts schemed over 165,000,000. when questioned by federal agents Tobin told the agents that he was involved in another scheme implicating a soccer coach from , which in turn lead to the . In February 2019, Tobin pled guilty to conspiracy and securities fraud. On June 7, 2019 a federal judge hit Tobin with a $ 4 million forfeiture. Scam Pump and dump stock are prevalent in spam, accounting for about 15% of spam e-mail messages. A survey of 75,000 unsolicited emails sent between January 2004 and July 2005 concluded that spammers could make an average return of 4.29% by using this method, while recipients who act on the spam message typically lose close to 5.5% of their investment within two days. A study by Böhme and Holz shows a similar effect. Stocks targeted by spam are almost always penny stocks, selling for less than $5 per share, not traded on major exchanges, are thinly traded, and are difficult or impossible to . Spammers acquire stock before sending the messages, and sell the day the message is sent. Comparison with other types of schemes A pump and dump scam is a type of , with the main difference between this scheme and most other types of bubbles being that the pump and dump bubble is deliberately perpetrated by unlawful activity. A pump and dump scheme is similar in many ways to a (in that both types of scam use misrepresentations in an effort to enrich the promoters and/or initial investors with money from later investors), however, there are a number of differences between the schemes: * Ponzi-type investments are privately traded, often between individuals that are known to one another, whereas pump and dump schemes are typically marketed to the general public and traded on public stock exchanges and the victims and perpetrators are not acquainted with each other. * Ponzi schemes typically promise very specific returns on investments and/or include falsified records implying consistent and steady returns, whereas pump and dump schemes only come with general and/or implied promises of substantial profits. * Ponzi schemes typically come with the expectation of profit over a relatively-extended period of time and typically last for months, years or even decades before their inevitable collapse. By comparison, pump and dump scams are designed to make profits extremely quickly and are executed over a period of weeks, days or even hours. * Pump and dump schemes are invariably intended to be scams from their conception, whereas Ponzi schemes are occasionally the result of investment vehicles that are originally intended to be legitimate but ultimately fail to perform as expected. * For all of the above reasons, Ponzi schemes tend to leave a far more extensive trail of . They are typically much easier to prosecute after they are discovered, and often result in much stiffer criminal penalties. Pump and dump differs from many other forms of spam (such as emails and messages) in that it does not require the recipient to contact the spammer to collect supposed "winnings," or to transfer money from supposed bank accounts. This makes tracking the source of pump and dump spam difficult, and has also given rise to "minimalist" spam consisting of a small untraceable image file containing a picture of a stock symbol. Short and distort A variant of the pump and dump scam, the "short and distort" works in the opposite manner. Instead of first buying the stock, and then artificially raising its price before selling, in a "short and distort" the scammer first the stock, and then artificially lowers the price, using the same techniques as the pump and dump but using criticism or negative predictions regarding the stock. The scammer then covers their short position when they buy back the stock at a lower price. Regulation One method of regulating and restricting pump and dump manipulators is to target the category of stocks most often associated with this scheme. To that end, penny stocks have been the target of heightened enforcement efforts. In the United States, regulators have defined a as a security that must meet a number of specific standards. The criteria include price, , and minimum . Securities traded on a national , regardless of price, are exempt from regulatory designation as a penny stock, since it is thought that exchange traded securities are less vulnerable to . Therefore, (NYSE:C) and other NYSE listed securities which traded below $1.00 during the market downturn of 2008–2009, while properly regarded as "low priced" securities, were not technically "penny stocks". Although penny stock trading in the United States is now primarily controlled through and s enforced by the and the (FINRA), the genesis of this control is found in state securities law. The was the first state to a comprehensive penny stock securities law. Secretary of State , whose office enforced state securities laws, was a principal proponent of the legislation. Representative , the only in the at the time, was a principal sponsor of the bill in the . Georgia's penny stock law was subsequently challenged in court. However, the law was eventually upheld in , and the became the template for laws enacted in other states. Shortly thereafter, both FINRA and the SEC enacted comprehensive revisions of their penny stock regulations. These regulations proved effective in either shuttering or greatly restricting broker/dealers, such as Blinder, Robinson & Company, which specialized in the penny stocks sector. Meyer Blinder was jailed for securities fraud in 1992, after the collapse of his firm. However, sanctions under these specific regulations lack an effective means to address pump and dump schemes perpetrated by unregistered groups and individuals. References Category:Monetary system